Monday, February 20, 2012

Net Worth Nonsense: What to Include in your Net Worth Calculations

Net Worth Nonsense:  What to Include in your Net Worth Calculations

I used to sell life insurance.  That meant that I sat at a lot of people’s dining room table helping them figure out their net worth.  I used some tools that were provided to me by the insurance company.  Today, there are plenty of net worth calculators on the web for you to use in your own home.

They all include boxes for your assets that include: real estate; retirement accounts; mutual funds; stocks; bonds; savings accounts and a few other asset classes.  Those are all fine and you should certainly include them.

It’s the categories for clothes, collectibles, appliances and automobiles that I have a concern with.  It’s entirely possible that if you add up all of the items on this list, they could easily come to $50-100K.  That’s a fair size chunk of a lot of people’s net work.  I’m not sure that including them creates an accurate picture of your net worth.

Let’s start with appliances.  If you’re including the fridge, stove and washer/dryer, you’re most likely going to sell them with your home, so they’re already included in the valuation of your house/condo.  Many people choose not to include their cars in calculating their net worth because they are a depreciating asset.  I choose not to because none of my cars have ever been worth very much.

Clothes should never be included.  After you buy them and take them home they are pretty much worthless to anyone except you.  You won’t get very much if you try and sell them – which is why they wind up at the thrift store. Collectibles and jewellery never get the prices we paid for them, and what’s worse they make us think that we have more money than we really do.

I tend to think of the asset side of the net worth statement as being full of assets that either appreciate or generate income.  Right now I’m living off of my investments, the calculations of my net worth are only useful to me if they either make money now or make money in the future.

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